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Avoiding employee tax problems in Maryland

A business owner must make decisions that improve the bottom line as much as possible. One of these decisions is in the way he or she hires people. Whether a worker is an employee or an independent contractor has many legal implications, not the least of which is what taxes you must pay on their behalf.

In general, an employer must withhold income tax from the paycheck of an employee. The employer must also withhold and pay Social Security and Medicare taxes, and pay unemployment tax on the employee’s wages. But if the worker is a contractor, there are no such obligations.

The IRS identifies four relationships between a business and those performing services for it. They are

  • Independent contractor
  • Employee
  • Statutory employee
  • Statutory nonemployee

Under common law, there are three questions an employer must ask while categorizing a worker. First, does the employer control, or have the right to control, what the worker does and how the worker does his or her job? Second, is the party paying, reimbursing or supplying the worker in control of the worker’s duties?

Finally, does the employer provide the worker with benefits associated with employees, like paid vacation or a pension plan, and is the work performed a key aspect of the business? The entirety of the relationship must be considered.

Misclassifying an employee as an independent contractor can have serious consequences for the business, whether it was an honest mistake or an attempt to avoid paying taxes. A tax attorney may be able to provide guidance for a business owner hoping to avoid trouble with the IRS.

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